Delaying Social Security best option for most retirees

Sunday

Apr 22, 2012 at 2:00 AM

According to the Social Security Administration, the vast majority of retirement benefit recipients (about 70 percent) elected to start their benefits early, between age 62 and their full retirement age.

David T. Mayes

According to the Social Security Administration, the vast majority of retirement benefit recipients (about 70 percent) elected to start their benefits early, between age 62 and their full retirement age.

Full retirement age falls somewhere between age 65 and 67, depending on when you were born. While health concerns or short life expectancies may have forced some of these retirees to tap their benefits early, most would likely have been much better off financially by waiting at least to full retirement age, and perhaps as late as age 70, to trigger these paychecks.

With fewer companies offering pension plans, Social Security is the only source of guaranteed income for the majority of today's retirees. Having an income source that lasts for life is an important tool for ensuring your retirement does not last longer than your resources.

Even when company pensions are available, Social Security offers some distinct advantages that make maximizing these benefits even more appealing.

First, unlike most pensions, Social Security benefits are automatically adjusted for inflation. In addition, Social Security benefits are not fully taxable. For most retirees, only 50 percent of their Social Security benefit will be subject to income tax, though up to 85 percent of the benefits may be taxable for higher-income recipients.

Claiming Social Security retirement benefits early may provide you with more checks, but this approach will likely lock in a smaller lifetime payout, especially for married couples. Starting your benefit at 62 means taking a 25 percent pay cut relative to your payout at full retirement age (age 66) if you were born between 1934 and 1954. You also have the opportunity to defer your benefit beyond full retirement age, earning yourself an 8 percent credit for each year you delay your claim. At age 70, your income will be 32 percent higher than at full retirement age and close to double your age-62 benefit after factoring in cost-of-living adjustments.

How long will it take for this larger, delayed paycheck to make up for the years of benefits you could have received if you started collecting early? Not long. You will break even at about age 77. Live beyond this age and you will have locked in a higher total payout that could mean hundreds of thousands more in retirement income over your lifetime.

But waiting to claim Social Security means that living expenses must be funded from retirement savings for up to eight years. Won't this mean larger withdrawals from these accounts, reducing the number of years they can be relied upon as an income source? The question of how the timing of Social Security claiming impacts the longevity of a retiree's nest-egg was addressed in recent research by William Meyer and William Reichenstein, which appears in the April edition of the Journal of Financial Planning. They looked at how delaying Social Security to full retirement age, age 68 and age 70 might impact a worker retiring at age 62 with various levels of other resources and a 30-year life expectancy at retirement. Their results show a considerable increase in the longevity of the retiree's financial portfolio when Social Security is delayed versus starting these benefits at age 62. For retirees with $700,000 or less in their 401(k) plan at retirement, rather than reducing a portfolio's life-span, delaying Social Security added a decade or more to the length of time the retiree could rely on his 401(k) plan to support his living expenses. While this increased portfolio longevity declines for wealthier retirees, the researchers found the benefit is still sizeable at levels of financial wealth of more than $1.5 million.

Clearly, it pays to make a reasoned choice regarding when to claim retirement benefits from Social Security. Health certainly plays a role, particularly for unmarried retirees. A serious illness or otherwise shortened life-expectancy should be weighed against the benefits of delay. Couples, however, need to consider their joint life expectancy in determining how best to fit Social Security into their retirement income plan. Even if one expects a shortened life, odds are that the other will live to age 85 or beyond. An early claim on Social Security benefits could leave this survivor without adequate resources.

David T. Mayes is a certified financial planner professional and IRS-enrolled agent at Mackensen & Company Inc., a fee-only advisory firm in Hampton. He can be reached at 926-1775, david.mayes@mackensen.com or by visiting www.mackensen.com.

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